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L BRANDS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[September 05, 2014]

L BRANDS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The following information should be read in conjunction with our financial statements and the related notes included in Item 1. Financial Statements.



Executive Overview In the second quarter of 2014, our operating income increased $18 million, or 5%, to $376 million, and our operating income rate remained relatively flat. Net sales increased $159 million to $2.675 billion, and comparable store sales increased 3%. At Victoria's Secret, sales increased 5%, and operating income increased 6%. At Bath & Body Works, sales increased 6%, and operating income increased 8%. At Victoria's Secret and Bath & Body Works International, sales increased 70%, and operating income increased 132%. For additional information related to our second quarter 2014 financial performance, see "Results of Operations." The global retail sector and our business continue to face an uncertain environment and, as a result, we continue to take a conservative stance with respect to the financial management of our business. We will continue to manage our business carefully and focus on the execution of the retail fundamentals.

At the same time, we are aggressively focusing on bringing compelling merchandise assortments, marketing and store and online experiences to our customers. We will look for, and capitalize on, those opportunities available to us in this environment. We believe that our brands, which lead their categories and offer high emotional content to customers at accessible prices, are well positioned.


Company-Owned Store Data The following table compares the second quarter of 2014 store data to the second quarter of 2013 and year-to-date 2014 store data to year-to-date 2013: Second Quarter Year-to-Date 2014 2013 % Change 2014 2013 % Change Sales per Average Selling Square Foot Victoria's Secret U.S. $ 202 $ 200 1 % $ 389 $ 385 1 % Bath & Body Works U.S. 163 155 5 % 298 286 4 % Sales per Average Store (in thousands) Victoria's Secret U.S. $ 1,216 $ 1,204 1 % $ 2,340 $ 2,320 1 % Bath & Body Works U.S. 385 366 5 % 704 676 4 % Average Store Size (selling square feet) Victoria's Secret U.S. 6,021 6,016 - % Bath & Body Works U.S. 2,357 2,359 - % Total Selling Square Feet (in thousands) Victoria's Secret U.S. 6,473 6,226 4 % Bath & Body Works U.S. 3,665 3,692 (1 )% 29-------------------------------------------------------------------------------- Table of Contents The following table compares second quarter of 2014 company-owned store data to the second quarter of 2013 and year-to-date 2014 store data to year-to-date 2013: Second Quarter Year-to-Date Number of Stores (a) 2014 2013 2014 2013 Victoria's Secret U.S.

Beginning of Period 1,065 1,019 1,060 1,019 Opened 11 19 18 23 Closed (1 ) (3 ) (3 ) (7 ) End of Period 1,075 1,035 1,075 1,035 Victoria's Secret Canada Beginning of Period 35 26 34 26 Opened 3 1 4 1 Closed - - - - End of Period 38 27 38 27 Bath & Body Works U.S.

Beginning of Period 1,553 1,568 1,559 1,571 Opened 3 1 4 1 Closed (1 ) (4 ) (8 ) (7 ) End of Period 1,555 1,565 1,555 1,565 Bath & Body Works Canada Beginning of Period 81 72 79 71 Opened 4 5 7 6 Closed - - (1 ) - End of Period 85 77 85 77 Victoria's Secret U.K.

Beginning of Period 7 2 5 2 Opened - - 2 - Closed - - - - End of Period 7 2 7 2 La Senza Beginning of Period 153 157 157 158 Opened - - - - Closed - - (4 ) (1 ) End of Period 153 157 153 157 Henri Bendel Beginning of Period 29 29 29 29 Opened - - - - Closed - - - - End of Period 29 29 29 29 Total Beginning of Period 2,923 2,873 2,923 2,876 Opened 21 26 35 31 Closed (2 ) (7 ) (16 ) (15 ) End of Period 2,942 2,892 2,942 2,892 _______________(a) Number of stores excludes independently owned Victoria's Secret, Bath & Body Works and La Senza stores operated by licensees and franchisees.

30 -------------------------------------------------------------------------------- Table of Contents Franchise Store Data The following table compares the second quarter of 2014 franchise store data to the second quarter of 2013 and year-to-date 2014 store data to year-to-date 2013: Second Quarter Year-to-Date Number of Stores 2014 2013 2014 2013 Victoria's Secret Beauty & Accessories Beginning of Period 209 126 198 108 Opened 21 17 34 37 Closed - - (2 ) (2 ) End of Period 230 143 230 143 Victoria's Secret International (Full Assortment) Beginning of Period 6 3 4 3 Opened 2 - 4 - Closed - - - - End of Period 8 3 8 3 Bath & Body Works International Beginning of Period 59 43 55 38 Opened 7 2 11 7 Closed - - - - End of Period 66 45 66 45 La Senza International Beginning of Period 328 341 331 339 Opened 2 9 2 19 Closed (23 ) (12 ) (26 ) (20 ) End of Period 307 338 307 338 Total Beginning of Period 602 513 588 488 Opened 32 28 51 63 Closed (23 ) (12 ) (28 ) (22 ) End of Period 611 529 611 529 Segment Reporting Change In the first quarter of 2014, we announced a change in our reportable segments.

Results from company-owned Victoria's Secret and Bath & Body Works stores in Canada were reclassified from Other into the corresponding Victoria's Secret and Bath & Body Works segments. Additionally, a new segment called Victoria's Secret and Bath & Body Works International was created which includes the Victoria's Secret and Bath & Body Works company-owned and franchised stores outside of North America. Therefore, beginning in 2014, we have three reportable segments: Victoria's Secret, Bath & Body Works and Victoria's Secret and Bath & Body Works International. While this reporting change did not impact our consolidated results, the segment data has been recast to be consistent for all periods presented throughout the financial statements and accompanying footnotes and Management's Discussion and Analysis of Financial Condition and Results of Operations.

31-------------------------------------------------------------------------------- Table of Contents Results of Operations Second Quarter of 2014 Compared to Second Quarter of 2013 Operating Income The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for the second quarter of 2014 in comparison to the second quarter of 2013: Operating Income Rate 2014 2013 2014 2013 Second Quarter (in millions) Victoria's Secret $ 293 $ 275 16.8 % 16.5 % Bath & Body Works 115 106 16.3 % 15.9 % Victoria's Secret and Bath & Body Works International 17 8 21.3 % 15.7 % Other (a) (49 ) (31 ) (33.3 )% (22.6 )% Total Operating Income $ 376 $ 358 14.1 % 14.2 % _______________(a) Includes Mast Global, La Senza, Henri Bendel and Corporate.

For the second quarter of 2014, operating income increased $18 million, or 5%, to $376 million, and the operating income rate declined to 14.1% from 14.2%. The drivers of the operating income results are discussed in the following sections.

Net Sales The following table provides net sales for the second quarter of 2014 in comparison to the second quarter of 2013: 2014 2013 % Change Second Quarter (in millions) Victoria's Secret Stores (a) $ 1,363 $ 1,281 6 % Victoria's Secret Direct 382 384 - % Total Victoria's Secret 1,745 1,665 5 % Bath & Body Works Stores (a) 638 611 4 % Bath & Body Works Direct 66 56 18 % Total Bath & Body Works 704 667 6 % Victoria's Secret and Bath & Body Works International (b) 80 47 70 % Other (c) 146 137 7 % Total Net Sales $ 2,675 $ 2,516 6 % _______________(a) Includes company-owned stores in the United States and Canada.

(b) Includes Victoria's Secret and Bath & Body Works company-owned and franchised stores outside of North America.

(c) Includes Mast Global, La Senza, Henri Bendel and Corporate.

The following table provides a reconciliation of net sales for the second quarter of 2014 to the second quarter of 2013: Victoria's Secret and Victoria's Bath & Bath & Body Works Secret Body Works International Other Total Second Quarter (in millions) 2013 Net Sales $ 1,665 $ 667 $ 47 $ 137 $ 2,516Comparable Store Sales 34 20 4 2 60 Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net 50 9 11 (1 ) 69 Foreign Currency Translation (2 ) (2 ) 2 (3 ) (5 ) Direct Channels (2 ) 10 - 2 10 International Wholesale, Royalty and Other - - 16 9 25 2014 Net Sales $ 1,745 $ 704 $ 80 $ 146 $ 2,675 32-------------------------------------------------------------------------------- Table of Contents The following table compares the second quarter of 2014 comparable store sales to the second quarter of 2013: Second Quarter 2014 2013 Victoria's Secret Stores (a) (b) 3 % 1 % Bath & Body Works (a) (b) 3 % 3 % Total Comparable Store Sales (b) (c) 3 % 2 % ________________ (a) Results include company-owned stores in the United States and Canada.

(b) The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. A store is typically included in the calculation of comparable store sales when it has been open or owned 12 months or more and it has not had a change in selling square footage of 20% or more.

Additionally, stores of a given brand are excluded if total selling square footage for the brand in the mall changes by 20% or more through the opening or closing of a second store.

(c) Includes Victoria's Secret U.S., Bath & Body Works U.S., La Senza, Bath & Body Works Canada, Victoria's Secret Canada, Victoria's Secret U.K. and Henri Bendel.

The results by segment are as follows: Victoria's Secret For the second quarter of 2014, net sales increased $80 million to $1.745 billion, and comparable store sales increased 3%. The net sales result was primarily driven by: • At Victoria's Secret Stores, net sales increased 6% related to increases across most categories including PINK, sport and core lingerie, driven by a compelling merchandise assortment that incorporated newness, innovation and fashion, as well as in-store execution.

• At Victoria's Secret Direct, net sales were about flat to last year; the decrease in apparel was offset by increases in PINK, sport and core lingerie. We are shifting our focus to the core categories of the brand including lingerie, PINK and beauty. As a result, net sales in the apparel category are declining as we reduce style counts and related inventory.

The increase in comparable store sales was driven by an increase in total transactions and higher average dollar sales.

Bath & Body Works For the second quarter of 2014, net sales increased $37 million to $704 million, and comparable store sales increased 3%. At both Bath & Body Works Stores and Bath & Body Works Direct, net sales increased across most categories including home fragrance, Signature Collection and soaps and sanitizers, which all incorporated newness and innovation.

The increase in comparable store sales was driven by higher average dollar sales.

Victoria's Secret and Bath & Body Works International For the second quarter of 2014, net sales increased $33 million to $80 million primarily related to the opening of new company-owned Victoria's Secret stores in the U.K. and additional stores opened by our partners.

Other For the second quarter of 2014, net sales increased $9 million to $146 million primarily related to higher revenue from sales of merchandise to our international partners from Mast Global.

Gross Profit For the second quarter of 2014, our gross profit increased $55 million to $1.044 billion, and our gross profit rate (expressed as a percentage of net sales) decreased to 39.0% from 39.3%, primarily driven by: Victoria's Secret For the second quarter of 2014, the gross profit increase was primarily driven by: • At Victoria's Secret Stores, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales. The increase in merchandise margin was partially offset by higher buying and occupancy expenses due to an increase in occupancy expense driven by higher net sales, investments in real estate and store-related activity.

• At Victoria's Secret Direct, gross profit decreased primarily due to lower merchandise margin dollars as a result of increased promotional activity in the apparel business.

The gross profit rate was flat to last year as the improved merchandise margin rate was offset by the increased buying and occupancy expense rate due to store-related activity.

33-------------------------------------------------------------------------------- Table of Contents Bath & Body Works For the second quarter of 2014, the gross profit increase was primarily driven by: • At Bath & Body Works Stores, gross profit increased due to higher merchandise margin dollars related to the increase in net sales. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses primarily driven by higher occupancy costs related to the increase in net sales and store-related activity.

• At Bath & Body Works Direct, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales.

The gross profit rate increase was driven by a decrease in the buying and occupancy expense rate due to leverage associated with higher net sales.

Victoria's Secret and Bath & Body Works International For the second quarter of 2014, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales due to the opening of new stores. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses for our company-owned stores due to an increase in occupancy expense driven by higher net sales, investments in real estate and store-related activity.

The gross profit rate decrease was driven by an increase in the buying and occupancy expense rate due to deleverage associated with the increase in occupancy expense due to the opening of new stores.

Other For the second quarter of 2014, gross profit decreased due to lower merchandise margin dollars primarily related to increased promotional activity at La Senza.

The decrease in merchandise margin dollars was partially offset by lower buying and occupancy expenses at Mast Global. The gross profit rate decreased significantly primarily driven by a decrease in the merchandise margin rate due to increased promotional activity at La Senza. The merchandise margin rate decrease was partially offset by a decrease in the buying and occupancy expense rate.

General, Administrative and Store Operating Expenses For the second quarter of 2014, our general, administrative and store operating expenses increased $37 million to $668 million primarily driven by an increase in store selling expenses related to higher sales volumes, increased international expansion and severance-related expenses.

The general, administrative and store operating expense rate was roughly flat.

Other Income and Expense Interest Expense The following table provides the average daily borrowings and average borrowing rates for the second quarter of 2014 and 2013: Second Quarter 2014 2013 Average daily borrowings (in millions) $ 4,964 $ 4,463 Average borrowing rate (in percentages) 6.65 % 6.88 % For the second quarter of 2014, our interest expense increased $5 million to $82 million primarily due to an increase in average borrowings related to the October 2013 $500 million note issuance, partially offset by a decrease in the average borrowing rate.

Other Income For the second quarter of 2014, our other income was roughly flat to last year.

Provision for Income Taxes For the second quarter of 2014, our effective tax rate was 36.4% compared to 36.7% in the second quarter of 2013. The second quarter 2014 and 2013 rates were lower than the Company's combined statutory federal and state rates primarily due to the resolution of certain tax matters.

34-------------------------------------------------------------------------------- Table of Contents Year-to-Date 2014 Compared to Year-to-Date 2013 Operating Income The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for year-to-date 2014 in comparison to year-to-date 2013: Operating Income Rate 2014 2013 2014 2013 Year-to-Date (in millions) Victoria's Secret $ 571 $ 539 17.0 % 16.8 % Bath & Body Works 195 180 15.2 % 14.6 % Victoria's Secret and Bath & Body Works International 32 12 21.6 % 13.5 % Other (a) (86 ) (62 ) (30.6 )% (23.8 )% Total Operating Income $ 712 $ 669 14.1 % 14.0 % _______________(a) Includes Mast Global, La Senza, Henri Bendel and Corporate.

For year-to-date 2014, operating income increased $43 million, or 6%, to $712 million, and the operating income rate increased to 14.1% from 14.0%. The drivers of the operating income results are discussed in the following sections.

Net Sales The following table provides net sales for year-to-date 2014 in comparison to year-to-date 2013: 2014 2013 % Change Year-to-Date (in millions) Victoria's Secret Stores (a) $ 2,609 $ 2,466 6 % Victoria's Secret Direct 740 743 - % Total Victoria's Secret 3,349 3,209 4 % Bath & Body Works Stores (a) 1,168 1,128 4 % Bath & Body Works Direct 118 100 18 % Total Bath & Body Works 1,286 1,228 5 % Victoria's Secret and Bath & Body Works International (b) 151 87 74 % Other (c) 280 260 8 % Total Net Sales $ 5,066 $ 4,784 6 % _______________(a) Includes company-owned stores in the United States and Canada.

(b) Includes Victoria's Secret and Bath & Body Works company-owned and franchised stores outside of North America.

(c) Includes Mast Global, La Senza, Henri Bendel and Corporate.

The following table provides a reconciliation of net sales for year-to-date 2014 in comparison to year-to-date 2013: Victoria's Secret and Victoria's Bath & Bath & Body Works Secret Body Works International Other Total Year-to-Date (in millions) 2013 Net Sales $ 3,209 $ 1,228 $ 87 $ 260 $ 4,784 Comparable Store Sales 57 29 9 1 96 Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net 91 15 19 (2 ) 123 Foreign Currency Translation (5 ) (4 ) 3 (8 ) (14 ) Direct Channels (3 ) 18 - 3 18 International Wholesale, Royalty and Other - - 33 26 59 2014 Net Sales $ 3,349 $ 1,286 $ 151 $ 280 $ 5,066 35-------------------------------------------------------------------------------- Table of Contents The following table compares year-to-date 2014 comparable store sales to year-to-date 2013: Year-to-Date 2014 2013 Victoria's Secret Stores (a) (b) 3 % 2 % Bath & Body Works (a) (b) 3 % 3 % Total Comparable Store Sales (b) (c) 3 % 2 % ________________ (a) Results include company-owned stores in the United States and Canada.

(b) The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. A store is typically included in the calculation of comparable store sales when it has been open or owned 12 months or more and it has not had a change in selling square footage of 20% or more.

Additionally, stores of a given brand are excluded if total selling square footage for the brand in the mall changes by 20% or more through the opening or closing of a second store.

(c) Includes Victoria's Secret U.S., Bath & Body Works U.S., La Senza, Bath & Body Works Canada, Victoria's Secret Canada, Victoria's Secret U.K. and Henri Bendel.

The results by segment are as follows: Victoria's Secret For year-to-date 2014, net sales increased $140 million to $3.349 billion, and comparable store sales increased 3%. The net sales result was primarily driven by: • At Victoria's Secret Stores, net sales increased 6% related to increases across most categories including PINK, core lingerie and sport, driven by a compelling merchandise assortment that incorporated newness, innovation and fashion, as well as in-store execution.

• At Victoria's Secret Direct, net sales were about flat to last year; the decrease in apparel was offset by increases in PINK, core lingerie and sport. We are shifting our focus to the core categories of the brand including lingerie, PINK and beauty. As a result, net sales in the apparel category are declining as we reduce style counts and related inventory.

The increase in comparable store sales was driven by an increase in total transactions and higher average dollar sales.

Bath & Body Works For year-to-date 2014, net sales increased $58 million to $1.286 billion, and comparable store sales increased 3%. At both Bath & Body Works Stores and Bath & Body Works Direct, net sales increased across most categories including home fragrance, soaps and sanitizers and Signature Collection, which all incorporated newness and innovation.

The increase in comparable store sales was driven by higher average dollar sales.

Victoria's Secret and Bath & Body Works International For year-to-date 2014, net sales increased $64 million to $151 million primarily related to the opening of new company-owned Victoria's Secret stores in the U.K.

and additional stores opened by our partners.

Other For year-to-date 2014, net sales increased $20 million to $280 million primarily related to higher revenue from sales of merchandise to our international partners from Mast Global.

Gross Profit For year-to-date 2014, our gross profit increased $96 million to $2.026 billion and our gross profit rate (expressed as a percentage of net sales) decreased to 40.0% from 40.3%, primarily driven by: Victoria's Secret For year-to-date 2014, the gross profit increase was primarily driven by: • At Victoria's Secret Stores, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales. The increase in merchandise margin was partially offset by higher buying and occupancy expenses due to an increase in occupancy expense driven by higher net sales, investments in real estate and store-related activity.

• At Victoria's Secret Direct, gross profit decreased primarily due to lower merchandise margin dollars as a result of increased promotional activity in the apparel business.

The gross profit rate was flat.

36-------------------------------------------------------------------------------- Table of Contents Bath & Body Works For year-to-date 2014, the gross profit increase was primarily driven by: • At Bath & Body Works Stores, gross profit increased due to higher merchandise margin dollars related to the increase in net sales. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses primarily driven by higher occupancy costs related to the increase in net sales and store-related activity.

• At Bath & Body Works Direct, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales.

The gross profit rate increase was driven by a decrease in the buying and occupancy expense rate due to leverage associated with higher net sales.

Victoria's Secret and Bath & Body Works International For year-to-date 2014, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales due to the opening of new stores. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses for our company-owned stores due to an increase in occupancy expense driven by higher net sales, investments in real estate and store-related activity.

The gross profit rate decrease was driven by an increase in the buying and occupancy expense rate due to deleverage associated with the increase in occupancy expense due to the opening of new stores. The buying and occupancy expense rate increase was partially offset by an increase in the merchandise margin rate.

Other For year-to-date 2014, gross profit decreased due to lower merchandise margin dollars primarily related to increased promotional activity at La Senza. The gross profit rate decreased significantly primarily driven by a decrease in the merchandise margin rate due to increased promotional activity at La Senza. The merchandise margin rate decrease was partially offset by a decrease in the buying and occupancy expense rate.

General, Administrative and Store Operating Expenses For year-to-date 2014, our general, administrative and store operating expenses increased $53 million to $1.314 billion primarily driven by an increase in store selling expenses related to higher sales volumes and increased international expansion.

The general, administrative and store operating expense rate decreased to 25.9% from 26.4% due to leverage associated with higher sales.

Other Income and Expense Interest Expense The following table provides the average daily borrowings and average borrowing rates for year-to-date 2014 and 2013: Second Quarter 2014 2013 Average daily borrowings (in millions) $ 4,964 $ 4,463 Average borrowing rate (in percentages) 6.65 % 6.92 % For year-to-date 2014, our interest expense increased $10 million to $166 million primarily due to an increase in average borrowings related to the October 2013 $500 million note issuance, partially offset by a decrease in the average borrowing rate.

Other Income For year-to-date 2014, our other income was roughly flat to last year.

Provision for Income Taxes For year-to-date 2014, our effective tax rate was 37.4% compared to 37.9% year-to-date 2013. The year-to-date 2014 and 2013 rates were lower than the Company's combined federal and state rates primarily due to the resolution of certain tax matters.

FINANCIAL CONDITION Liquidity and Capital Resources Liquidity, or access to cash, is an important factor in determining our financial stability. We are committed to maintaining adequate liquidity. Cash generated from our operating activities provides the primary resources to support current operations, growth initiatives, seasonal funding requirements and capital expenditures. Our cash provided from operations is impacted by our net income and working capital changes. Our net income is impacted by, among other things, sales volume, seasonal sales 37-------------------------------------------------------------------------------- Table of Contents patterns, success of new product introductions and profit margins. Historically, sales are higher during the fourth quarter of the fiscal year due to seasonal and holiday-related sales patterns. Generally, our need for working capital peaks during the summer and fall months as inventory builds in anticipation of the holiday period.

We believe in returning value to our shareholders through a combination of dividends and share repurchase programs. During year-to-date 2014, we paid $491 million in regular and special dividends and repurchased $48 million of our common stock. We use cash flow generated from operating activities and financing activities to fund our dividends and share repurchase programs.

Our total cash and cash equivalents held by foreign subsidiaries were $225 million as of August 2, 2014. Under current tax laws and regulations, if cash and cash equivalents held outside the U.S. are repatriated to the U.S., in certain circumstances we may be subject to additional income taxes.

The following table provides our long-term debt balance as of August 2, 2014, February 1, 2014 and August 3, 2013: August 2, February 1, August 3, 2014 2014 2013 (in millions) Senior Unsecured Debt with Subsidiary Guarantee $1 billion, 5.625% Fixed Interest Rate Notes due February 2022 ("2022 Notes") $ 1,000 $ 1,000 $ 1,000 $1 billion, 6.625% Fixed Interest Rate Notes due April 2021 ("2021 Notes") 1,000 1,000 1,000 $500 million, 5.625% Fixed Interest Rate Notes due October 2023 ("2023 Notes") 500 500 - $500 million, 8.50% Fixed Interest Rate Notes due June 2019, Less Unamortized Discount ("2019 Notes")(a) 494 494 491 $400 million, 7.00% Fixed Interest Rate Notes due May 2020 ("2020 Notes") 400 400 400 Total Senior Unsecured Debt with Subsidiary Guarantee $ 3,394 $ 3,394 $ 2,891 Senior Unsecured Debt $700 million, 6.90% Fixed Interest Rate Notes due July 2017, Less Unamortized Discount ("2017 Notes")(b) $ 715 $ 718 $ 719 $350 million, 6.95% Fixed Interest Rate Debentures due March 2033, Less Unamortized Discount ("2033 Notes") 350 350 350 $300 million, 7.60% Fixed Interest Rate Notes due July 2037, Less Unamortized Discount ("2037 Notes") 299 299 299 5.25% Fixed Interest Rate Notes due November 2014, Less Unamortized Discount ("2014 Notes")(c) 214 215 216 Total Senior Unsecured Debt $ 1,578 $ 1,582 $ 1,584 Total $ 4,972 $ 4,976 $ 4,475 Current Portion of Long-term Debt (214 ) (215 ) - Total Long-term Debt $ 4,758 $ 4,761 $ 4,475 _______________(a) The balances include a fair value interest rate hedge adjustment which increased the debt balance by $2 million as of August 2, 2014 and February 1, 2014. The interest rate hedge adjustment as of August 3, 2013 was not significant.

(b) The balances include a fair value interest rate hedge adjustment which increased the debt balance by $16 million as of August 2, 2014, $19 million as of February 1, 2014 and $20 million as of August 3, 2013.

(c) The balances include a fair value interest rate hedge adjustment which increased the debt balance by $1 million as of August 2, 2014, $2 million as of February 1, 2014 and $3 million as of August 3, 2013.

Issuance of Notes In October 2013, we issued $500 million of 5.625% notes due in October 2023 utilizing an existing shelf registration under which debt securities, common and preferred stock and other securities can be issued. The 2023 Notes are jointly and severally guaranteed on a full and unconditional basis by certain of our 100% owned subsidiaries (such subsidiaries, "the Guarantors"). The proceeds from the issuance were $495 million, which were net of issuance costs of $5 million.

Revolving Facility On July 18, 2014, we entered into an amendment and restatement ("Amendment") of our secured revolving credit facility ("Revolving Facility"). The Amendment maintains the aggregate amount of the commitments of the lenders under the Revolving Facility at $1 billion and extends the termination date from July 15, 2016 to July 18, 2019. In addition, the 38-------------------------------------------------------------------------------- Table of Contents Amendment allows certain of our non-U.S. subsidiaries to issue loans and obtain letters of credit in U.S. dollars, Canadian dollars or British pounds.

In addition, the Amendment reduced fees payable under the Revolving Facility which are based on our long-term credit ratings. The fees related to committed and unutilized amounts per year are 0.30% per annum, and the fees related to outstanding letters of credit are 1.50% per annum. In addition, the interest rate on outstanding U.S. dollar borrowings and British pound borrowings is LIBOR plus 1.50%. The interest rate on outstanding Canadian dollar borrowings is Canadian Prime Rate plus 0.50% or Canadian Dollar Offered Rate ("CDOR") plus 1.50%.

We incurred fees related to the Amendment of the Revolving Facility of $5 million, which were capitalized and are being amortized over the remaining term of the Revolving Facility.

The Revolving Facility continues to contain fixed charge coverage and debt to EBITDA financial covenants. We are required to maintain a fixed charge coverage ratio of not less than 1.75 to 1.00 and a consolidated debt to consolidated EBITDA ratio not exceeding 4.00 to 1.00 for the most recent four-quarter period.

In addition, the Revolving Facility provides that investments and restricted payments may be made, without limitation on amount, if (a) at the time of and after giving effect to such investment or restricted payment the ratio of consolidated debt to consolidated EBITDA for the most recent four-quarter period is less than 3.00 to 1.00 and (b) no default or event of default exists. As of August 2, 2014, we were in compliance with both of its financial covenants. The ratio of consolidated debt to consolidated EBITDA was less than 3.00 to 1.00 and no default or event of default existed.

During the second quarter of 2014, we borrowed and repaid $5 million under the Revolving Facility. The maximum daily amount outstanding at any point in time during the second quarter was $5 million.

As of August 2, 2014, there were no borrowings outstanding under the Revolving Facility.

Letters of Credit The Revolving Facility supports our letter of credit program. We had $8 million of outstanding letters of credit as of August 2, 2014 that reduce our remaining availability under our Revolving Facility.

Fair Value Interest Rate Swap Arrangements In July 2014, we entered into interest rate swap arrangements related to $100 million of the outstanding 2017 Notes and $100 million of the outstanding 2019 Notes. In 2013, we entered into interest rate swap arrangements related to $200 million of the outstanding 2017 Notes and $200 million of the outstanding 2019 Notes. The interest rate swap arrangements effectively convert the fixed interest rate on the related debt to a variable interest rate based on LIBOR plus a fixed percentage.

The swap arrangements are designated as fair value hedges. The changes in the fair value of the interest rate swaps have an equal and offsetting impact to the carrying value of the debt on the balance sheet. The differential to be paid or received on the interest rate swap arrangements is accrued and recognized as an adjustment to interest expense.

In the past, we entered into interest rate swap arrangements on the 2014 and 2017 Notes. In 2012, we terminated these interest rate designated fair value hedges. Both the carrying values of the 2014 and 2017 Notes include unamortized hedge settlements which are amortized as a reduction to interest expense through the respective maturity date of the Notes.

39-------------------------------------------------------------------------------- Table of Contents Working Capital and Capitalization We believe that our available short-term and long-term capital resources are sufficient to fund foreseeable requirements.

The following table provides a summary of our working capital position and capitalization as of August 2, 2014, February 1, 2014 and August 3, 2013: August 2, 2014 February 1, 2014 August 3, 2013 (in millions) Cash Provided by Operating Activities (a) $ 446 $ 1,248 $ 354 Capital Expenditures (a) 349 691 383 Working Capital 1,119 1,324 613 Capitalization: Long-term Debt 4,758 4,761 4,475 Shareholders' Equity (Deficit) (504 ) (370 ) (861 ) Total Capitalization $ 4,254 $ 4,391 $ 3,614 Remaining Amounts Available Under Credit Agreements (b) $ 992 $ 992 $ 984 _______________ (a) The February 1, 2014 amounts represent a twelve-month period and the August 2, 2014 and August 3, 2013 amounts represent six-month periods.

(b) Letters of credit issued reduce our remaining availability under the Revolving Facility. We have outstanding letters of credit that reduce our remaining availability under the Revolving Facility of $8 million as of August 2, 2014 and February 1, 2014 and $16 million as of August 3, 2013.

Credit Ratings The following table provides our credit ratings as of August 2, 2014: Moody's S&P Fitch Corporate Ba1 BB+ BB+ Senior Unsecured Debt with Subsidiary Guarantee Ba1 BB+ BB+ Senior Unsecured Debt Ba2 BB- BB Outlook Stable Stable Stable Our borrowing costs under our Revolving Facility are linked to our credit ratings at Moody's, S&P and Fitch. If we receive an upgrade or downgrade to our corporate credit ratings by Moody's, S&P or Fitch, the borrowing costs could decrease or increase, respectively. The guarantees of our obligations under the Revolving Facility by the Guarantors and the security interests granted in our and the Guarantors' collateral securing such obligations are released if our credit ratings are higher than a certain level. Additionally, the restrictions imposed under the Revolving Facility on our ability to make investments and to make restricted payments cease to apply if our credit ratings are higher than certain levels. Credit rating downgrades by any of the agencies do not accelerate the repayment of any of our debt.

Common Stock Share Repurchases Under the authority of our Board of Directors, we repurchased shares of our common stock under the following repurchase program during year-to-date 2014 and 2013: Average Stock Shares Amount Price of Shares Repurchased Repurchased RepurchasedRepurchase Program Amount Authorized 2014 2013 2014 2013 within Program (in millions) (in thousands) (in millions) November 2012 $ 250 826 1,217 $ 45 $ 55 $ 48.52 The November 2012 repurchase program had $131 million remaining as of August 2, 2014. There were no share repurchases reflected in Accounts Payable on the August 2, 2014 or August 3, 2013 Consolidated Balance Sheets.

The timing and amount of any repurchases will be made in our discretion taking into account a number of factors including market conditions.

We use cash flow generated from operating activities and financing activities to fund our share repurchase programs.

40-------------------------------------------------------------------------------- Table of Contents Dividend Policy and Procedures Under the authority and declaration of our Board of Directors, we paid the following dividends during the second quarter and year-to-date of 2014 and 2013: Ordinary Special Dividends Dividends Total Dividends Total Paid (per share) (in millions) 2014 Second Quarter $ 0.34 $ - $ 0.34 $ 99 First Quarter 0.34 1.00 1.34 392 2014 Total $ 0.68 $ 1.00 $ 1.68 $ 491 2013 Second Quarter $ 0.30 $ - $ 0.30 $ 87 First Quarter 0.30 - 0.30 87 2013 Total $ 0.60 $ - $ 0.60 $ 174 Our Board of Directors will determine future dividends after giving consideration to the Company's levels of profit and cash flow, capital requirements, current and forecasted liquidity, the restrictions placed upon us by our borrowing arrangements as well as financial and other conditions existing at the time. We use cash flow generated from operating activities to fund our ordinary dividends and a combination of cash flow generated from operating activities and financing activities to fund our special dividends.

Cash Flow The following table provides a summary of our cash flow activity for year-to-date 2014 and 2013:

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